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NFA Proposes New Safeguards for Customer Funds CME Requires

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NFA Proposes New Safeguards for Customer Funds CME Requires newsbriefs NFA Proposes New Safeguards provide certain financial and operational ment companies such as mutual funds and for Customer Funds information on a monthly or semi-monthly exchange-traded funds. In their complaint, The National Futures Association pro- basis. NFA said it plans to make some of which was filed on April 17 with the U.S. posed new financial requirements intended this information publicly available on its District Court for the District of Colum- to strengthen regulations regarding the website. bia, the two organizations charged that treatment and monitoring of customer seg- the CFTC’s amendment of Rule 4.5 was CME Requires Daily Reporting regated funds held by futures commission “arbitrary and capricious” and claimed of Segregated Funds Balances merchants. The proposed requirements, that the CFTC violated the Administrative which were announced on May 29, place On May 1, CME Group began requir- Procedure Act as well as the Commodity new restrictions on the withdrawal of cus- ing all futures commission merchants to Exchange Act. The two organizations said tomer funds from segregated accounts and file daily statements for customer funds the rules were adopted “without satisfying require additional disclosure by FCMs. The in segregated, secured and sequestered the agency’s obligation to weigh the costs new requirements also apply to customer accounts by 12:00 noon each day. These or benefits of the rule” and add an unnec- secured amounts held in foreign futures and statements must be signed by each firm’s essary and redundant layer of regulation options accounts. The proposed require- chief executive officer or chief financial on top of the existing rules imposed on ments are now pending approval from the officer or their designated representative. investment companies by the Securities Commodity Futures Trading Commission. CME also announced its plans to perform and Exchange Commission. “These new requirements will help begin “limited reviews” of the daily statements “on the process of restoring public confidence in a surprise basis.” U.S. Options Industry the financial integrity of customer segre- “Customer segregation is the cornerstone Criticizes New Tax Rules gated funds,” said NFA President Dan Roth. of the futures industry, and it is critical to U.S. options industry representatives “Making this information available to the ensure the protections afforded under seg- cautioned that rules proposed by the public will give investors a better picture of regation are as strong as they can be for our Internal Revenue Service to implement a the financial standing of the FCM with which market participants,” CME said in an advisory dividend withholding tax on foreign options they are conducting business.” notice explaining the new requirements. traders will disrupt markets and drive away Under the proposed rules, all FCMs CME added that it is working with the business from foreign investors. The IRS must have written policies and procedures industry to adopt “further improvements” to proposed the rules in connection with the regarding the maintenance of the firm’s customer protections and determine “best Foreign Account Tax Compliance Act, a law residual interest in its customer segregated practices” for internal controls and proce- enacted in 2010 intended to combat tax funds. These policies and procedures must dures over customer assets. For example, evasion by foreign investors in U.S. markets. target an amount either by percentage or CME said disbursements of customer funds Options industry representatives warn dollars that the FCM seeks to maintain as its that exceed 25% of excess funds will have that the rules, which could take effect at the residual interest in those accounts. to be pre-approved in writing by a firm’s beginning of 2013, would drive away busi- The proposed rules restrict the amount of chief executive officer, chief financial officer ness from U.S. markets because they would funds an FCM can withdraw from customer or designated principal. In addition, clearing discourage non-U.S. investors from engag- segregated funds account to 25% unless the members will be required to file bi-monthly ing in a wide range of routine transactions. firm’s chief executive officer, chief financial reports on how customer funds are invested In a comment letter submitted to the IRS officer or other defined principal pre-approves and where those funds are held. on April 6, the U.S. Securities Market Coali- the transaction in writing. In addition, the CME said the bi-monthly investment tion, a group that includes all of the U.S. FCM must immediately notify NFA in writing reporting requirement will take effect on July options exchanges and the Options Clearing of that disbursement, disclose the amount of 1, with the first report due on July 15. Corporation, cautioned that the proposed the withdrawal, provide the reason for with- regulations would preclude non-U.S. Mutual Funds Challenge drawal, and confirm that a qualified individual persons from entering into a wide range of CFTC Rulemaking pre-approved the disbursement in writing. options transactions. “The proposed regula- The FCM also must disclose in its notice The Investment Company Institute, a tions would have a disruptive effect on the to NFA the amount of the remaining total trade association that represents the U.S. option markets,” the group wrote. “They residual interest in the customer segregated mutual fund industry, joined with the U.S. would impose withholding tax on dividends funds accounts and provide a representation Chamber of Commerce in filing a legal and would effectively preclude foreign per- that the FCM remains in compliance with challenge against the Commodity Futures sons from using these trading strategies.” segregation requirements. Trading Commission’s final rule imposing The industry coalition also cautioned The NFA rules also call for FCMs to certain regulations on registered invest- that in order to comply with the proposed newsbriefs regulations, broker/dealers will have to incur priced $3 per share or less. form joint venture futures brokerages, with substantial systems costs. “The Coalition is The second initiative approved by the an investment ceiling of up to 49%, 2) the concerned that some broker/dealers may SEC updates existing market-wide circuit investment ceiling in joint venture securities decide not to permit foreign customers to breakers that when triggered halt trading brokerages will be raised from 33% to 49%, trade on U.S. options exchanges rather than all exchange-listed securities throughout and 3) the investment quota for QFIIs will be incur these systems costs.” the U.S. markets. The changes lower the raised from $30 billion to $80 billion. The Chicago Board Options Exchange, percentage of a market decline required to In 2007 the Chinese government allowed also part of the coalition, filed separate trigger a halt and shorten the amount of time three futures brokerage joint ventures to be comments as well, estimating that foreign that trading is halted. In addition, the circuit established through its special trade agree- participants account for 15% to 20% of trad- breakers will use the S&P 500 index rather ment with Hong Kong and Macau. Since ing volume on U.S. options exchanges. “The than the Dow Jones Industrial Average as then no new joint ventures in futures broker- proposed regulations would lead directly to a the pricing reference to measure a market age have been allowed. A Treasury spokes- reduction in this trading volume,” the CBOE decline. person confirmed that the new commitment warned. The exchange also said that the opens the market to foreign investors from proposed regulation would impose U.S. with- New Standards for Financial any country and permits those investors to holding tax on many options transactions, Market Infrastructures take up to a 49% equity stake. In addition, such as spreads, “that have nothing to do Two international groups of market any existing joint ventures that have less with avoiding withholding tax on dividends.” regulators—the Committee on Payment than 49% foreign equity ownership will be and Settlement Systems and the Technical allowed to increase the foreign equity own- SEC Approves Measure Committee of the International Organiza- ership to 49%. To Limit Volatility tion of Securities Commissions—published The Securities and Exchange Com- a joint report on April 16 titled “Principles Australia Looks to Industry mission announced on June 1 that it has for Financial Market Infrastructures.” The to Lead Derivatives Revamp approved two proposals submitted by the report is intended to serve as an important Australia’s Council of Financial Regulators national securities exchanges and the Finan- benchmark for regulatory standards around issued a consultation paper on April 14 on cial Industry Regulatory Authority that are the world. The report outlines 24 high-level the implementation of G-20 commitments designed to address extraordinary volatility principles for the proper management and on OTC derivatives in Australia. In contrast in individual securities and the broader stock operation of financial market infrastructures to the approach being taken in many other markets. The changes will be implemented such as clearinghouses and trade reposito- jurisdictions, the Australian regulators said by Feb. 4, 2013. ries. These principles cover such issues as that “industry-led solutions” should be the “In today’s complex electronic markets, segregation and portability, credit and liquid- preferred route to increasing the use of cen- we need an automated and appropriately ity risk management, governance, financial tralized infrastructure within the Australian calibrated way to pause or limit trading if resources and access requirements. CPSS OTC derivatives market. But they added that prices move too far too fast,” said SEC and IOSCO said their members will strive if progress fails to keep pace with interna- Chairman Mary Schapiro. to adopt the new standards by the end of tional developments, regulators should have The “limit up-limit down” mechanism 2012.
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